OnDeck

As I wrote last week in my first story on TheStreet.com, I’m bullish on the prospects of FinTech and wider tech industry’s recent and upcoming IPO’s, so I’ll shift focus my this week from marketplace lending to marketplaces for equity markets.

Last week, well known New York startup – and yet another success story from Fred Wilson‘s Flatiron Ventures – Etsy, went public. Although not a FinTech company, my interest in Etsy’s IPO is due to equity crowdfunding aspect of its IPO.

You may think it was just another IPO – just as OnDeck, the fintech company, went public in Dec. 2015. But, while my former colleagues at investment bank Morgan Stanley took Etsy public, what was unusual was a portion of the offering was reserved for crowdfunding – in keeping with the company’s focus on individuals, and it’s story of empowering individual artists and designers.

Beyond the company’s desire to do something with its public offering to reinforce its brand, it was pretty surprising to me that Morgan Stanley allowed individual investors without a relationship with Morgan Stanley to get shares.

In my experience, high profile anticipated IPO’s, such as last year’s Nimble Storage, are very hard to get access to as a regular retail investor. In fact, this is often touted as one of the benefits of doing business with a full-service broker.

Marketplace for IPO’s

What’s going on? Why would a very traditional investment bank, especially Morgan Stanley – with its core strategic wealth management business – be open to equity crowdfunding that in some ways undermines its business model?

As part of broader development of crowdfunding – from new products (e.g. Kickstarter), stakes in startups (e.g. CircleUp, AngelList), loans (e.g. Prosper, Lending Club) – equity crowdfunding is finally growing in acceptance and importance.

In fact, the biggest FinTech IPO of 2014 offered an equity crowdfunding component: While underwritten by Morgan Stanley, LendingClub offered crowdfunding using Fidelity Investments (where I began my career).

In the case of Etsy, last week, however, Morgan Stanley used not the market leader, LOYAL3, nor Fidelity, but rather its own in-house global stock plan services (GSPS) capabilities, along with its platform partner, IPREO.

(Morgan Stanley is a leader in stock plan services from when Citi’s contributed GSPS to MSSB joint venture; Colbert Narcisse, the long-time leader of the unit is a well-known innovator).

Bottom line: From the conversations I’ve had with those who in this industry, what’s driving this change is increasing market validation of the role and value of equity crowdfunding.

Another recent success in the context of the IPO market is this month’s underwriting of GoDaddy, where LOYAL3 played the role of partner to enable retail investors to participate in IPO.

LOYAL3 is a great company that’s a “marketplace” for direct investing and getting access to IPO’s. Like many leaders in FinTech, it’s based here in San Francisco at border of the Financial District and SoMa, near Prosper and Lending Club. It’s the industry leader in its space.

LOYAL3 signs up companies – from tech companies like Amazon, Twitter, Yahoo, Facebook and Apple, to others ranging from Mattel, Hasbro, and McDonalds – so that individuals can buy their stock directly at low cost.

Direct investing in companies has been around for a while, however LOYAL3 brings innovations from its technology to make it easier to focusing on the “brand building” and relationship aspect of “investing in what you love,” its earlier tag line. It makes sense – an example of investor Peter Lynch’s rule to invest in what you know.

I expect to see LOYAL3 and others riding the wave of giving individuals access to low-cost investing and access to IPO’s in 2015 and beyond. Strategically, they might expand into the pre-IPO crowdfunding market (where CircleUp competes).

Regulation: Watch This Space

For those interested in this area, watch for the continued word on the final regulations and clarifications of rules for equity crowdfunding arising from the JOBS Act. Recently, in fact, I tweeted a link to California’s draft crowdfunding framework:

But based on public information I’ve read in the press, several of the big FinTech names are all considered strong contenders to go public in the next year, including Oportun (formerly Progresso Financiero), PayPal, Square and Stripe.

Others, such as Ant Financial (Alibaba’s finance arm) and Avalara, a cloud-based solution for taxes may follow: the pipeline for FinTech IPO’s will be interesting to watch.

Since today is 4/20, I’ll wrap up by saying when it comes to IPO’s: I’ve Got Five on It. It’s not a lot of money, but the individual investor should be able to participate in this asset class, and hats off to those who make it happen.

While I focus on SF / Silicon Valley, since I am based in San Francisco, last week I spoke with Jonathan Lehr, my former co-worker at Morgan Stanley who is now working in venture capital (along with my former colleague, Julian Levy, who just joined Index Ventures) about New York’s FinTech ecosystem.

For the last few years, Jon has been running the New York Enterprise Tech MeetUp (NYETM.com), which he co-founded with another ex colleague, Rubi Gaddi, who continues to work at Morgan Stanley’s Technology Business Development team.

After speaking with Jon about the great deal flow at his venture fund and incubator for enterprise technology, Work Bench, I wanted to devote a post to New York.

I was reminded of the strength of the New York-based FinTech start up scene, which is many ways not surprising given the concentration of banks and talent.

Here’s some geographic analysis I did this week, after analyzing the Decemer 2014 Periodic Table of FinTech, which had a list of about 100 FinTech companies, and their main backers and potential acquirers, from CB Insights.

Source: CB Insights; graphic by theFinTechBlog

As you can see, SF Bay Area leads, but NYC is a close second (which makes sense given the characteristics noted above). Here is a snapshot of the Periodical Table of FinTech from CB Insights. Click here for the full-sized version.

(I liked the infographic, but SoFi, Stellar, and NerdWallet are obvious omissions. Also while chart had Level Money, it didn’t put Capital One as a potential buyer — and they announced its acquisition this week).

Since it’s hard to see on this page, if you don’t want to click through the full version, the list of New York FinTech firms was OnDeck, CAN Capital (whose head of People Operations is my ex colleague, Mandy Sebel, from Scient), Mozido, Betterment, LearnVest, Kapitall, BillGuard, Estimize, Axial, and IEX.

I noticed that SF/Silicon Valley has edge in Lending, Payments, Personal Finance, but NY wins out in tools used by banks. There’s a more comprehensive profile of NY-based FinTech Firms from Jesse Podell which you can see on his slideshare.

It’s worth keeping in mind that last month’s IPO of SF-based LendingClub last month was larger, but NY-based OnDeck, a provider of small business loans, raised more than $200m. While startups like Plastiq that were founded in Boston will tend to relocate to Silicon Valley (following in the footsteps of WePay), New York has a critical mass of FinTech firms and is growing.

One other reason NYC is a hub for FinTech is the support of groups like Made in NY and the FinTech Innovation Lab, an accelerator backed by Accenture and a consortium of banks, with operations in New York (as well as London and Asia).

As I’ve posted earlier, I’ve attended lab events in New York, and was impressed by the caliber of the startups in the accelerator and the quality of advice, from mentors at banks, to talks such as “How to Sell to Wall St.” provided by Merritt Lutz.

(Merrit is a mentor of mine at Morgan Stanley and advisor to its SF-based private equity fund, Morgan Stanley Expansion Capital, run by tech investors Pete Chung and Lincoln Isetta, with whom I also worked at Morgan Stanley).

So, for New York entrepreneurs considering entering FinTech, it would be smart to investigate the FinTech Innovation Lab. There are more details on the Lab’s site at www.fintechinnovationlab.com.

But since the Lab’s accelerator just closed for applications — I’d tweeted to my followers about last December’s deadline — any aspiring entrepreneurs should look into the 2015 FinTech Hackathon and the New York Enterprise Tech Meetup.

I’d read last week that New York’s FinTech Hackathon has had over 1,000 participants since it was started.

Impressive. I also saw that sign up’s for 2015 hackathon will start soon, and you can sign up online to find out more here.

In and around New York, both in FinTech and related areas, there is just so much to keep track of from startups like yext, whose leadership includes my former colleague Wendi Sturgis, to mobile team collaboration provider Lua Technologies.

Doing work similar to what I did at Scient, I’d like to highlight a top New York-based marketing strategy and execution shop with roots in Silicon Valley, called Cf – headed up by Arthur Ceria, former creative director of Ogilvy in SF and co-founder Michael Quinn. While they can support anyone in FinTech, they also deliver digital strategy and projects for the retail sector as well.

Incidentally, one of the FinTech firms I met with when I worked in NYC was Betterment, which I’ll profile in a future post.

Overall, I miss the days in NYC when Jon Lehr and I brought in outside innovators like Rachel Haot, the first Chief Digital Officer for New York City, and Misko Hevery, inventor of AngularJS framework, to celebrate innovation and technology.

Wrapping up, I’d like to note that while New York-based Movenannounced its smart watch app this past week, I don’t think it will be much of a game changer. That said, I am upbeat about Apple Watch and will be tracking smart watch apps in 2015.

Best wishes to all the technologists (including those I’ve worked with), and innovators / startups in New York City.

Last week, the biggest news in FinTech was Lending Club (NASDAQ: LC) went public in an IPO that was significant for 3 reasons:

First, it’s now one of the best-known public names in FinTech, and more specifically is new proof point that traditional financial services, such as credit, can be disrupted by a technology-focused startup.

Second, the size of the offering and the amount raised – which was over $1B, since the underwriters exercised their full option for 8.7 million shares – put it among the largest US technology IPO’s in recent memory. This is significant since the scale both generated headlines and calls attention to category.

Third, the business model: peer-to-peer (P2) or marketplace lending, is a key category for a range of players in FinTech, such as Prosper, OnDeck and SoFi.

The business model has been explained sufficiently elsewhere, but the essence is that the Internet enables customers to borrow more cheaply than they might have using traditional sources. On the other side of the balance sheet, lenders (‘investors’) can receive a higher return for a fairly transparent amount of risk than they would otherwise. A win-win.

And what growth….

Source: Company Filing

On a personal note, as a San Francisco area resident, I was also glad to see the success of Lending Club as a validation of this new emerging category of business to be based here.

Its HQ is right in heart of South of Market (SoMa) alongside Twitter, New Relic, Google, GitHub, DropBox, Quid and Hired.com

Note: Lending Club was once based in Sunnyvale and Redwood City, moving to SF in 2011, so also constitutes an example of recent migration from Silicon Valley to SF.

As a former Morgan Stanley executive, Cynthia Gaylor, who worked at the office I did at Sand Hill Road in Menlo Park, tweeted in 2013 when she left the bank to head up Twitter’s corporate development team, “Let the migration north begin!”

While one could certainly argue – and analyst coverage would definitely support this view – that Lending Club is a financial services company, to me the company is also very much a tech company for 3 reasons: origins, culture and vision.

First, remember… this was literally one of the first apps you could use on Facebook! Further, the founders were not bankers, but rather included CEO Renaud Laplanche as a former the entrepreneur who had a successful exit, and then worked at Oracle).

The culture is also typical of that at most technology companies, in terms of what’s seen as positive about working in tech, i.e. open and collaborative culture, non-hierarchial, focus on engineering, importance of product, and “quirkiness” (e.g. offices to encourage a sense of play and collaboration).

In terms of culture, Glassdoor gives Lending Club gets a 4.6 / 5 star rating. Just compare that to traditional banks like Morgan Stanley, where it’s about 3.5: Lending Club gets ratings more like a well-run tech company or startup.

More importantly, the vision. As John Battelle said this fall at NewCo Silicon Valley’s kick off event at Survey Monkey’s HQ, the latest crop of tech firms based are looking more than just to make money – they want to change the world, or at least improve something that is broken. Lending Club definitely has that vision.

In fact, it was born of the founder’s frustration that typical credit card rates were 18%, which seemed altogether too high to him, so he envisioned a way to match borrowers and lenders directly. There’s obviously much more to it, but the best business idea also has a simple “story” to it, and clearly this is true for Lending Club.

This blog does not provide investment advice, so I’m not going to provide a view of their valuation, but I applaud their success. CEO Renaud Laplanche is not someone I know, but connected with when I when I moved to San Francisco, as a fellow graduate of London Business School.

It’s good to see a fellow graduate succeed, especially when these days an MBA carries less weight than being a full stack engineer. The world needs both!

From my experience in launching new products at established banks and startups, Lending Club provides a compelling example of how to embrace the value of technology in a really smart way, and deliver value to several market participants.

And the timing couldn’t be better. The IPO market is back on track in 2014, with recent successful IPO of Alibaba earlier this fall. Just today, another, albeit smaller marketplace lender, OnDeck focused on small business lending, went public.

Well done, Lending Club – here’s hoping many other FinTech firms will find similar success, rewarding entrepreneurship and risk-taking, and hopefully providing a push towards innovation among the larger financial services companies, as well as a shift in the corporate cultures of banks – both here in the US and around the world – towards a more inclusive, collaborative culture.

Not all banks will fully embrace user-centric design or Scrum, but I hope some do, along with view that making things better is more than just delivering a slightly better loan or APY…

“We want to transform the banking system into a marketplace that is more competitive, more consumer-friendly, more transparent.” CEO Renaud Laplanche

Welcome news, and a model to emulate….. it takes more than just ping pong tables and pet-friendly environment!